Regional wrangling mustn't hamper SA growth

South Africa must use the meeting of the heads of state of the Southern African Customs Union countries, which takes place in Pretoria on Friday, as an opportunity to initiate a frank discussion with its Sacu partners about recasting the organisation’s purpose and reorganising its institutions.

Sacu is the oldest customs union in the world and consists of South Africa and the BLNS states—Botswana, Lesotho, Namibia and Swaziland. Sacu’s founding treaty of 1910 was renegotiated by the apartheid government in 1969 and transformed into an instrument for projecting South Africa’s hegemony in the region as a way of bolstering the country’s international ambitions.

To legitimise its regional influence and reward the BLNS countries for ceding their economic sovereignty to South Africa, the apartheid regime transferred fiscal revenues to these countries on the basis of a fixed share for each country.

Given the “colonial” nature of the previous Sacu set-up, the African National Congress government, when it came to office in 1994, called for far-reaching changes to the 1969 agreement. This paved the way for the conclusion, in 2002, of a new treaty that led to the democratisation of Sacu policies and decision-making processes. The new pact also resulted in the revision of the revenue-sharing formula that determines fiscal allocations from a common revenue pool.

It is clear, however, that despite its democratisation Sacu has not functioned optimally. In particular, it has been hobbled by a number of problems that have undermined South Africa’s economic interests. At the heart of Sacu’s institutional paralysis has been a lack of commonly agreed principles and shared values.

The conduct of Sacu affairs has been characterised by a tendency to dwell on differences rather than on common objectives; Sacu countries have been more interested in competing rather than collaborating with one another. Thus, forging consensus on key policy issues has been very difficult. This has highlighted the challenge of attempting to integrate economies at different levels of development and with divergent needs and interests.

Another problem with the revised Sacu agreement is that it has been implemented in a selective and skewed fashion. There has been a disproportionate focus on the common revenue pool, with little or no attention being given to other treaty obligations, such as developing policy convergence in areas such as agriculture, industrial policy, competition policy, infrastructure development, as well as cooperation on trade and investment promotion.

Economic diplomacy
Significantly, the Sacu pact has had the effect of curtailing South Africa’s ability to pursue its external economic policy objectives. An anomalous situation has arisen where South Africa (which accounts for 95% of Sacu’s economic output) has not been able, for example, to evolve an assertive free-trade agreement (FTA) strategy to strengthen its economic diplomacy in the face of regional and global challenges brought about by the rise of emerging powers such as China, Brazil and India.

A key feature of these countries’ policy approach has been to use FTAs as a tool of industrial strategy and integration into the global economy. South Africa has not been able to craft an assertive FTA strategy because the Sacu pact stipulates it cannot do so without the consent of the BLNS countries.

Despite their tiny economies and the fact that they do not have ambitious trade interests—their view of the global economy is confined to the European market—the BLNS states have wielded a great deal of power over South African trade policies. Some of them, notably Botswana, have used this power to torpedo South Africa’s interests. The fissures that developed between South Africa and its Sacu counterparts during the negotiation of an economic partnership agreement with the European Union underlined the capacity of the customs union’s institutional arrangements to thwart South ­Africa’s trade ambitions.

Given this state of affairs, it is worth asking why South Africa has continued to prop up an institution that has acted in ways that are inimical to its foreign economic goals. Is it worth preserving Sacu in its present form, even if it is at the risk of sacrificing South Africa’s economic sovereignty?

The present situation is untenable and serves neither South Africa’s nor the BLNS states’ long-term interests. What is needed is a renegotiation and overhaul of the Sacu agreement. This must deal first with the contentious issue of revenue transfers to the BLNS states. Second, it must give appropriate recognition to South Africa’s pivotal role in the region.

Drawn mainly from customs revenue and excise duties collected largely from within South Africa, the transfers have ranged in total from about R20-billion to R27-billion. For reasons that have yet to be substantiated empirically, some economists have argued that the transfers compensate for the trade benefits—the so-called polarisation effects—that flow to South Africa as a result of the customs union, presumably because of the country’s dominant economy. South Africa, therefore, compensates for the “harm” that it is ostensibly causing to its Sacu neighbours.

Sustainable development
Be that as it may, the fiscal transfers have fuelled a culture of entitlement and dependency that has undermined meaningful development in the smaller Sacu states. Assured of a regular stream of revenue, these countries have dragged their feet in implementing domestic policies that would place them on a path of balanced and sustainable development.

The precipitous decline of these revenues in the past few years, a consequence of the global financial crisis, has underscored their unsustainability as well as the dangers of fiscal dependency. As recent events in Swaziland have shown, there is a real possibility that some of the Sacu countries could soon become failed states.

These circumstances have necessitated a different approach to how the common revenue pool is managed, one that is based on new principles and institutional architecture. Such an approach needs to recognise the fact that under the current Sacu treaty, as opposed to that of 1969, the BLNS countries are a key part of decision-making within the customs union and have greater latitude to determine their own economic policies. This has therefore diminished the case for retaining the compensation mechanism for these countries.

Going forward, South African policymakers have two policy options. One is to discontinue the revenue transfers. This would have catastrophic economic and social consequences for the smaller Sacu countries and for wider regional security, with the concomitant political fallout. A viable option would be for South Africa to push for a redefinition of the principles and terms of the fiscal transfers and for a review of their sources. The transfers must be reconstituted as development assistance—which is what they are, in reality—with clear criteria regarding how such assistance would be structured and provided.

Revamping Sacu along these lines would enable the country not only to reset its relations with the BLNS countries on better terms, but also to exercise prerogatives commensurate with its economic size and contribution to regional integration. It would allow for greater transparency and accountability in terms of how aid is sourced and used by recipient countries. It would enable South Africa to take a lead in shaping Sacu’s policy progress and institutional development. It would provide South Africa with sufficient room to pursue its foreign policy interests.

This means the country would be able, for example, independently to develop a robust FTA strategy to fulfil its global trade aspirations, while also responding to regional challenges and sensitivities. And, crucially, it would allow South Africa to work with its Sacu partners to craft long-term development strategies that are less dependent on aid.

Dr Mills Soko is an associate professor at the University of Cape Town’s Graduate School of Business. Dr Mzukisi Qobo is a research associate in the University of Pretoria’s department of political sciences